Feature story

Sir Donald Brydon proposed recommendations to improve quality and effectiveness of audit in his report

Sir Brydon published his report of the independent review into the quality and effectiveness of audit.

The starting point of Sir Brydon was the presumption that the audit is not good enough as it is now.

The report suggests that firstly, audit needs to have a clearly understood and fully encompassing purpose. It also proposes to establish:

the “Corporate Auditor” as a new profession

a “Resilience Statement” replacing the Going Concern and Viability Statements

an “Auditor Fraud Panel” with the ability to levy sanctions on auditors

The recommendations proposed in the report are not only for auditors but also relate to other stakeholders. Read more

International Developments

IAASB Feedback statement and way forward on audits of less complex entities (LCEs)

The International Auditing and Assurance Standards Board (IAASB) published its feedback statement which provides an overview of the key messages from the responses to the recent IAASB discussion paper.

The feedback statement summarises that:

respondents think that revising the ISAs would be the most effective solution in addressing issues and challenges, but recognise that this would not be timely

developing a separate standard is perceived as a timelier solution by respondents

guidance is not seen as a standalone solution

overall, the IAASB is encouraged to consider a combination of approaches to tackle the issues at hand

Way forward

The IAASB will continue to analyse the feedback from stakeholders to help determine the way forward. Further information gathering activities will continue until June 2020, at which time the IAASB will make a decision about the way forward. Read more

The IAASB released International Standard on Auditing (ISA) 315 (Revised 2019).

The main objective of the revision was to encourage a more consistent and robust risk assessment. The impact of the evolving environment in which businesses operate, particularly in relation to technology, was also taken into consideration.

The standard will become effective for financial statement audits for periods beginning on or after 15 December 2021.

The revision has also resulted in conforming and consequential amendments to other international standards. Read more

The PCAOB issued a concept release on a potential approach to revising its quality control standards

The Public Company Accounting Oversight Board (PCAOB) is requesting comments on what changes might be proposed in the future to strengthen the requirements for audit firms’ quality control systems.

This potential approach is based on the proposed international standard on quality management, ISQM 1, with certain differences as appropriate for firms that are subject to PCAOB standards and rules.

If a new PCAOB Quality Control standard is proposed in the future, there will be another opportunity to comment on the proposal.

The deadline for the submission of comments on this concept release is 16 March 2020. Read more

SEC proposes to modernise auditor independence rules

SEC proposed amendments designed to modernise certain auditor independence requirements. The proposal is likely to reduce compliance costs for both audit firms and their clients by updating certain aspects of the auditor independence requirements that may be unduly burdensome. The Chairman of SEC, Jay Clayton, states that the proposed amendments would also increase the number of qualified audit firms an issuer could choose from. Read more

Policymakers and scholars around the world have attempted to solve the auditor independence puzzle through a variety of mechanisms, including prohibitions and rotations. More recent proposals have also included breaking up audit firms and the empowerment of shareholders. This paper argues that none of these solutions is entirely convincing. For this reason, the paper proposes a new model to solve the auditor independence puzzle. Read more

National Developments

Slovakia: More companies become exempt from mandatory audit

In Slovakia, more companies become exempt from mandatory audit as from January 2020. A recent change in the Accounting Act has seen a 100% increase of the threshold for balance sheet total and for net turnover.

This means that companies are now required to have an audit if, for 2 consecutive financial years, they meet at least 2 of the following criteria:

The Portuguese Securities Market Commission (CMVM), the audit oversight authority, issued guidelines on audit quality indicators (AQIs). Stakeholders had until 15 November to comment on them. The guidelines are set to become applicable already for audits related to financial year 2019.

In the first phase of application of the guidelines, which is expected to be at least 1 year, the CMVM intends to:

assess the adherence of the indicators and metrics to the market

check the reliability of understanding and completeness of the reporting models and introduce any adjustments

sensitize key users – audit firms and supervisory bodies in particular – about the benefits of using AQIs in promoting audit quality

The guidelines set the 8 following AQIs (either in the perspective of the audit firm or the engagement project), each one split into several metrics:

AUDIT HOURS – proper involvement of employees with more experience

PARTNER WORKLOAD – availability (hours) of the partner who is in charge of the audit

EXPERIENCE – years of experience of auditors and staff

TRAINING – number of hours of training of auditors and staff

TURNOVER RATE – percentage of employee departure

HOURS PER AUDIT PHASE – hours spent on each audit by phase (planning, execution and reporting) and indication of completion dates

QUALITY CONTROL FUNCTIONS – hours of employees affected to the areas of quality control

Audit firms will have to report to CMVM information according to the guidelines. In the first year, this will be mandatory only for the Big 6 audit firms in Portugal and only for a small sample of audits of Public Interest Entities (PIEs) – namely financial institutions, insurers and listed companies.